GUEST EDITORIAL: Corporate tax code needs overhaul

Individual taxpayers who think rates are too high can’t just stay in the USA and send their payments to another country, one where they have relatives, that offers lower rates. But corporations can and, increasingly, they do.

In the past decade, almost 50 companies — including Fruit of the Loom, Tyco International and Ingersoll Rand — have moved their taxable business addresses to places such as Bermuda, the Cayman Islands and various European countries with rates lower than the top U.S. corporate tax rate of 35% (39.1% if you include average state taxes).

On one hand, who can blame them? The U.S. rate is the highest in the developed world, and it’s legal to keep the company headquarters and most of the business in the USA but move the corporate address abroad by jumping through some regulatory hoops.

On the other hand, these corporate “inversions” are ugly. They let companies enjoy the advantages of doing business in the USA — including the rule of law, robust financial markets and the world’s strongest military — while others pay most of the tab.

The congressional Joint Committee on Taxation estimates that one proposal to discourage inversions would save almost $20 billion over 10 years.

This should be yet another wake-up call for Congress that it’s past time to overhaul the expensive and maddeningly complicated U.S. tax code, both for individuals and corporations.

Ideally, lawmakers would give corporations an incentive to stay home by substantially lowering the corporate rate and making up the revenue loss by closing loopholes that now let some companies pay little or no taxes, or by shifting some of the burden to shareholders by raising taxes on dividends.

But Congress has been killing off such ideas since the last overhaul, in 1986. There’s no chance of a rewrite in what’s left of this election year — and maybe not until after the presidential election in 2016.

What to do now? The smartest short-term solution is limited action by the administration.

After first saying Treasury had no tools to stop inversions, Treasury Secretary Jacob Lew reversed course and said he’s looking at ways to make the practice more difficult and less profitable. One way to do that would be to raise the current requirement that a corporation’s foreign “parent” hold at least 20 percent of the corporation’s stock to allow an inversion. Another is for Treasury to prevent companies from pretending that internal investments are arms-length loans.

The mere announcement that Treasury might act cast a useful pall over some of the pending inversion deals.

A little shame also helps. For businesses that sell directly to consumers, an unpatriotic image can be toxic. Fear of a consumer backlash helped deter drugstore giant Walgreens from moving abroad, for example.

The best way to stop companies from fleeing the United States in search of lower taxes is to write a rational tax code. Until that happens, though, limited action by regulators — and public pressure from consumers — are appropriate substitutes.